As we were expecting yesterday, there is some let-up in the fierce down move. Markets are looking like they want some intermediate bottom, with some relief rally likely in different pockets. So today was that day where some relief was there on several stocks, although not the entire market was going up after the drubbing US stocks got on Friday. Today’s market was a surprise for many that we did not get roiled alongside that.

Today’s topic is going to be a lot of data from the past, covering massacres that we’ve had in the market and how stocks and sectors move during that.

Where is the market headed?

Market Overview

The market is making a very small comeback from its bottom today. It opened at its lowest recent low of 21,964 and 22,082, still down 0.17%. The low of the day was very near the open of the day, and that is always a good sign. On a daily candle basis, we are now almost 1,800 points from its recent top, and some reversion to the mean is certainly required here, which is probably what is getting attempted.

Nifty Next 50

Nifty Junior, after yesterday’s nice bounce back, again made a strong comeback at half a percent. Still nowhere near an uptrend, but the downtrend is suggestive of some pause here. At least we are still very far from a position where we can say that the market is going up.

Nifty Mid and Small Cap

Mid caps lost ground in the morning but at least came back and recovered. Most of it closed at flat 0.16% up. Small caps actually did better than that, up 1.15% for the day. So the last two sessions have been buyers trying to pull back into the selling, and sellers taking some backseat at least for some time.

Nifty Bank Overview

Bank Nifty also moved 0.27% up. Bank Nifty, interestingly, has not broken the January lows that it had made in the beginning of the year. Gold is going up again by 0.82%.

GOLD

Gold looks like we are headed to a new high very soon. We are somewhere near 86,300 at the time of this report.

Advanced Declined Ratio Trends

You can see Nifty not so good—almost equal. Nifty Bank also almost equal. Mid cap slightly better, Nifty Next 50 equal. Nifty 100 also equal. Nifty 500 was reasonably good, and small caps were very good, actually 69 to 31. Mid caps also equal, and Nifty 200 is also equal. So it was between neutral to slightly positive bias.

Nifty Heatmap

On the heat map, you can see BPCL, SBI, Bharat Electronics, Shriram Finance—these stocks did well. Bajaj Auto is getting butchered. Hero Moto is getting butchered. In fact, Bajaj Auto’s ED came on the television and said that this falling market is causing people to postpone their two-wheeler buying decisions, and that probably also helped Hero Moto go down. So Bajaj Auto is now at 7,300, at 12,000. Its promoter had said that the stock is worth 20,000. So never ever believe in any narrative that is said in the markets. Follow price. Price is the real thing. Everything else is wishful thinking.

Within the Nifty Next 50 space, you had Varun Beverages go up 4.5%, BHEL, Hindustan Aeronautics. All the defense stocks actually did well today. Union Bank, IRFC, IOC, Interglobal Aviation—all these were up 3% or more. And you had Adani Green, LTI, Mindtree, Info Edge, Dabur, Bosch, Havels, ICICI Lombard—these were the stocks that were moving down.

Sectoral Overview

Sectoral trends again: Defense, Media, PSU banks, public sector enterprise stocks, central public sector enterprise stocks, energy, and oil and gas. These were the ones with half a percent to 2.5% gains for the day, so good recovery of some sorts. Capital market was only up 0.4%. Capital market is the worst hit in the last one week and hardly any recovery there. So it is kind of suggesting that the entire market is not going to move up very soon.

Autos taking a beating on all this narration about decisions getting postponed. IT stocks are nervous ahead of what US President may say tonight. FMCG down, consumption stocks down, MNC down—everything is red. One month, three months, and six months now on the screen: Not very pretty at all. And for one year also, several sectors have dipped into high double-digit losses.

For instance, energy is now down 25% year on year. Oil and gas is down 20% year on year. Real estate is down 13% year on year. So that’s not a good sign at all.

Sectors of the Day

Nifty IND Defence Index

Defense, has moved up, BDL, Misra Dhatu, Paras, Defense, GRSE, HAL—All these stocks made a comeback. It does look like the defense is trying to find its feet. It’s sort of a double bottom here. It is not making newer lows like the rest of the market. So maybe, just maybe, defense is looking better than others.

Story of the Day : Beware, don’t let anyone trick you into this.

So what is this trick that we will discuss? We’ll discuss the 2008 global financial crisis. That crisis was a big eye-opener. First, let’s see what happened before the GFC. So pre-GFC, you can see here that post the 2000 dot-com boom, we had a 52% correction, and this is the Nifty index. Then from 2003 onwards, we had a rally. And post-2004, when it made a new high, it just rocketed beyond that.

So, May 2003 from the bottom till January 2008, Nifty went up 581% in less than five years. Can you imagine that kind of a move today? 581%. Almost like six times from where you started this time, even if you take pre-Covid levels, 12,000 or even at the bottom at 8,000, it would have meant 48,000 on Nifty for that kind of move to have happened. And we’ve petered out at 26,000, actually. So that move for today’s generation, who has not seen that move, cannot imagine the fierceness and the craziness of that move. You know, we have seen nothing like that since then—581% from that point.

Now, let’s see which sectors led this rally prior to the crash. So, when we look at granular data before that, you will see that in 2003, you had public sector enterprise stocks, energy stocks, and pharma stocks. These were running very, very hard—more than 100%, 83%, and so on. In 2004, again, services were up. 2004 was a more shallow year. You had pharma, and it sort of took over in 2005. Then FMCG, auto, MNCs, infra—these stocks did better than Nifty.

Then in 2006, you had infra continuing, with banking joining the game. Private banks were up 54%, media stocks 74%. And the last one, in 2007, you had commodities, energy, infra, and private banks—all doing nearly 100%, even after those significant years of gain. In 2007, these sectors went up like crazy—100%. Public sector enterprise, infra, energy, commodities, private banks, and so on—whereas Nifty was up 54% in that period.

So, this was the sort of rally for the top sectors. Energy made a 48% CAGR in those four odd years, public sector enterprise made 46% gains, services 41%, Nifty itself was 41%. Can you imagine 41% for four to five years of CAGR? MNCs at 29%, pharma was 25%, FMCG at 23%—it was the weakest at 20%. So that was the kind of rally we had in the pre-GFC period.

Then the crash happened from January 2008 to September, October 2008. It was the crash, and a very sharp recovery followed. The crash was very big—a 64% drawdown on Nifty. Stocks were down like 90%, 80%, 95%, and the recovery also was reasonably fast. From October 2008, which was the Lehman crisis crash, the recovery came around in less than a year and a half or two. Full recovery beyond this actually took six years, but there was a three to four-year period where we just simmered around here. The quick recovery after the fall did not take more than a couple of years.

So, the calendar year 2008 returns net-net were -52% on Nifty. Now, what happened in 2008 when Nifty fell 52%? FMCG fell only 20%, pharma fell only 25%, PSU banks fell 40%. Some of these sectors were actually outperforming the fall as it fell down, and some of the sectors which were falling much more rapidly than Nifty—real estate was down 83%, media was down 68%, commodities 57%, infra 57%, private banks 57%, autos and it almost 54-55%. These were the sectors that underperformed in that year, and these were the sectors that did the outperformance.

And now, when the recovery happened, from 2008 onwards, or let’s say from January onwards till December 2014, when the next rally happened, Nifty had an 18.7% CAGR. So, just imagine if today we are here, perhaps, and let’s say this does not happen. So the kind of future move that is possible here should not be discounted.

The post-crash rally was an 18.7% CAGR rally. Let’s see which sectors performed. So in 2009, autos took the lead, followed by IT and commodities, private banks, CPSC—all these sectors were leading in a big way. Autos almost had a 200% gain in just 2009. In 2010, private banks, pharma, autos, PSU banks were in the lead with more than 30% kind of gains. Then in 2011, it was a completely flattish year. FMCG managed 8.6%, and everything else was in the red. Autos were actually down 19%, private banks were down 20-25%. Then in 2012, again private banks made a 67% gain, real estate made a 52% gain, FMCG and auto again came back.

This was all while Nifty was just going flattish. Then in 2013, it took the lead. Pharma was also not too far behind at 26.5%. In 2014, private banks again came back very hard—68%, 67% on PSUs, 56% on auto, 43% on pharma. Again, you can see that from 2008 till 2014, while Nifty was not making new highs, many sectors were rotating very rapidly from one sector to the other. And if you had an active strategy, which was moving from these sectors to the other, you would have made huge gains even while the overall market was not moving.

So, for instance, from pre-GFC leaders, you saw energy, PSU, and services. This time, the leadership in the recovery phase was autos (41% CAGR), private banks (33% CAGR), IT stocks (31% CAGR), pharma stocks (29% CAGR), and FMCG (25.7% CAGR). These are all those sectors that were not performing before GFC, but post-GFC, they came into the leadership position. Similarly, what was really outstandingly performing before GFC was services, PSU, and energy stocks—they took a back seat post-GFC.

So, you know, stocks and sectors that really perform very well in one bull rally post the crash, or post the correction, may not be the same ones which will go up again. Hence, your portfolios need to dynamically shift from one to the other.

The takeaway is that energy, public sector enterprise, and services, which were solidly performing before the GFC crisis, were not the ones leading the rally post-GFC. Auto, private banks, IT, and pharma emerged as leaders during the phase of recovery, which were not doing so well in the pre-GFC space. Every rally churns out new sectoral leadership. You don’t know what set of sectors will lead the rally next time. Leadership from the previous rally most often than not will not lead the next rally. So whatever stocks really did well, for instance, if we talk about today, whatever stocks really did well in the last few years probably are not going to be the ones that will lead the rally coming forth, whenever it does.

And that is why this retail run after sectoral thematic schemes is going to be like a musical chair. You will get stuck here. Don’t let anyone trick you into this thought process that if a sector is doing well, and hence you should put significant money in that sector because it will do well in the future. Also, it may do well far in the future, but a sector which has really done very well in the last few years is likely to stay in a consolidation mode for a long period before it will start a leadership position again.

So, any one sector or theme stating that this is for the long term, especially in today’s exponential and evolving era, is going to be wrong. So follow an adaptive strategy. It is absolutely critical that your strategy can rotate you from the winners of the past to the winners of the future. That is the only way of playing this market. Either you can guess them, or you can follow a tactical BBC principle type of strategy called Bao Bhagwanche, where you are following the price, and the price is letting you know which sectors are going to evolve.

So in tomorrow’s episode, we will see how the leadership changed in the last 10 years. This was the 2008 period, and now we will do a study on 2015 to 2024 in the next one. So let me know how you like this commentary, and if your strategy is capable of automatic rotation between sectors or if you think that you will be able to guess right what is going to do well in the coming years by your discretionary ways.

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